Commission to clarify definition of financial planning service

When the Financial Advisers Act commences, persons who provide a “financial planning service” as part of a business are required to be authorised as financial advisers by the Securities Commission, pay the required fees (which are not insubstantial), have the required qualifications to provide financial advice, keep their knowledge up-to-date, meet conduct standards, be part of a dispute resolution service and make the required disclosures.

The requirements apply, in the financial planning service case, whether or not the products advised on are “complex” (category 1) or “simple” (category 2), and even if the advisers’ employer is a QFE and responsible for the advisers’ conduct.

A financial planning service means analysing a person’s current financial situation, identifying financial goals and developing financial options for realising those goals. This can be as little as saying “you have this much now, you’ll need this much to buy this item you want, and if you save $10 a week in the bank for this long you’ll have enough”.

There is a danger that the financial planning service definition is too broad when it is read literally. Already it has been acknowledged that the title “financial planning service” is a misnomer, as it is broader than the services a “financial planner” would provide. The definition has been causing some confusion now, and is likely cause even more, when an increasing number of individuals try and interpret it closer to the date the new law commences. Some clarification to the wording in the definition would be desirable.

The test would be improved if it applies only when the adviser conducts a detailed analysis of the client’s financial position and likely future income and expenditure, and develops a plan or alternative plans which are designed to seek to deliver the client’s retirement or other significant long term financial goals.

A financial plan does not typically involve only a review of a person’s current financial position. It would ordinarily include a review of the client’s future income and expenditure. It would also be desirable if the financial goals to be addressed are overall long term (significant) goals, not just current goals, say to buy a television or pay-off the next lay-buy. The definition would be further improved if the reference to “options” is changed to “a plan or plans” to reflect the level of sophisticated advice a true planner would ordinarily provide.

If a bank staff member suggests to an investor that a maturing term deposit be reinvested (an option) or suggests a longer term at a better rate this time (another option), having inquired and discovered that the customer doesn’t require the money immediately (current financial situation) and wishes to continue saving for retirement or even to increase wealth (goal), the advice would meet the “financial planning service” definition (and give rise to the significant compliance obligations referred to earlier). It would not matter that the products commented on were not complex or if the bank was a QFE, the bank employee would still need to meet the standards of a trained experienced financial planner. This poses a dilemma for the bank. Does the bank discourage employees providing helpful advice on the best alternative (options) for their customers, in case the advice oversteps the mark? Should the banks risk breaching the law to provide such advice?

Bank staff are often called on to advise on simple financial options inherent in the choices offered by a bank. All it would take is that the advice is given in the context of the customer disclosing their financial goals (which can be as simple as saving for the future) and their current financial situation (this is all I have), and there is a risk of breaching the law (if the employee is not an authorised financial adviser). Caution on the part of the banks may prevail, as the dispute resolution process will provide plenty of opportunity for disaffected customers to allege, at the bank’s cost, that they received a financial planning service from an unauthorised adviser. Better, the definition be amended, as suggested earlier.